US consumption may drop if stocks plunge like dot-com bust: BOK

Seoul, Jan 16 (LatestNewsX) A sharp drop in US stock prices similar to the collapse of the dot-com bubble could trigger a steep contraction in US consumer spending, South Korea’s central bank said on Friday, noting the local economy, too, may suffer serious setbacks should such a case occur.

According to a recent report by the Bank of Korea (BOK) on U.S. consumption, a 10 per cent decline in US equity prices would reduce annual consumption growth by about 0.3 percentage point, reports Yonhap news agency.

In the event of a sharper drop of around 30 per cent, comparable to the dot-com bubble burst, consumption growth could fall by as much as 1.7 percentage points, the report said.

“U.S. households face risks to purchasing power stemming from inflation and labor market conditions, while consumption has become dependent on volatile stock prices and spending by high-income households,” the BOK said. “Under these circumstances, the risk of a sharp downturn in the U.S. economy would increase if a shock occurs.”

The BOK noted that U.S. household purchasing power is expected to continue to rise at a moderate pace, but downside risks related to employment and inflation remain significant.

It also warned that widening income and asset inequality among households could heighten vulnerability to economic shocks.

“As the South Korean economy is heavily influenced by U.S. investment in artificial intelligence (AI) and household demand, it is necessary to closely monitor these risk factors,” the report read.

Meanwhile, the central bank said it will extend a financial support program for small and medium-sized enterprises (SMEs) and self-employed workers amid a sluggish recovery in vulnerable sectors of the economy.

The Bank of Korea’s (BOK) low-rate special loan programme worth 14 trillion won (US$9.51 billion) was set to expire this month, but it will be extended by six months through the end of July, according to the bank officials.

—LatestNewsX

na/